The Pensions Regulator

Draft guidance to help trustees calculate transfer values

Ref: PN08-17
8 August 2008

Draft guidance on calculating transfer values for members of defined benefit schemes has today been published by the Pensions Regulator for consultation.

A ‘cash equivalent transfer value’ is normally the expected cost to the scheme of providing the member’s accrued benefits. This value requires assumptions to be made about the future course of events affecting the scheme and the member’s benefits – factors including investment returns, mortality rates and inflation rates.

The guidance aims to help DB scheme trustees understand and fulfil new responsibilities being introduced in regulations by the Department for Work and Pensions. From 1 October 2008, it will be the responsibility of the trustees to take the decisions on which the calculation of cash equivalent transfer values is based.

The regulator’s draft guidance provides suggestions of good practice on the calculation of CETV, including calculations for schemes in wind up and dealing with enquiries in a PPF assessment period, and emphasises the supporting role of the scheme actuary.

Chris Dobson, Pensions Regulator executive director, said: “We welcome industry views on our draft transfer values guidance.

“The guidance – being published ahead of the new transfer value legislation coming into force – explains the new duties for trustees in respect of transfer values, highlights the importance of collaborative working and outlines methods for calculation of transfer values.”

Editor's notes

1. The six-week consultation period ends on 19 September.
2. For further information on amendments to the Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008 SI 2008/1050 please contact the Department for Work and Pensions.
3. This guidance must be read in conjunction with the regulations. It does not override the regulations.
4. Whilst the guidance is aimed primarily at trustees, it will also be relevant to actuaries and others involved with transfer values, such as scheme administrators. It is also likely to be of interest to employers.
5. Transfers of defined benefits are relatively uncommon in practice, principally because the risk-reward profile of the transfer value in a money purchase arrangement is not usually attractive to most defined benefit members. Nevertheless, there can be reasons why it is desirable for a member to take a transfer, for example, to take benefits early where the scheme does not permit it. The calculation may also be used to facilitate pension sharing on divorce settlements. Transfers are also completed where the member has accepted an inducement offer from the employer to transfer out of the scheme.
6. The guidance does not cover the calculation of money purchase cash equivalent transfer values as this is generally straightforward – it is the accumulated contributions made by and on behalf of the member together with investment returns. By contrast, in the case of defined benefits, the CETV is a value determined on actuarial principles and requires necessarily subjective assumptions to be made about the future course of events affecting the scheme and the member’s benefits.
7. The Pensions Regulator is the regulator of work-based pension schemes in the UK, with objectives to protect members' benefits, promote good administration and reduce the risk of calls on the Pension Protection Fund. Our approach is risk-based focusing on education and enablement, with enforcement where appropriate. We have the ability to:
   • collect information about pension schemes; through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
   • issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
   • direct pension schemes as to how to calculate their liabilities and the contributions required;
   • issue a contribution notice where there is a deliberate attempt to avoid liabilities, or a financial support direction where the employer is a service company or insufficiently resourced.